Professional Documents
Culture Documents
National Income
Lecture Plan
• Objectives
• Circular Flow of Economic Activities and Income
– Two Sector Model
– Four Sector Model
• Macroeconomic variables
• Concepts of National Income
• Measuring National Income
• Uses of National Income Data
• Difficulties in Measurement of National Income
Objectives
• To explain the circular flow of economic activity and
income.
• To introduce the concepts of aggregates, stock and
flow and final goods.
• To explain various concepts of national income, like
GDP, GNP and NNP.
• To discuss and analyze the different methods to
measure national income.
• To understand the advantages of national income
calculation in global perspective.
Circular Flow of Economic Activities and
Income
The simple model of the circular flow assumes two players
Firms
• Produce and supply the goods and services.
• Require various factors of production to produce these goods and
services.
Households
• Include a set of individuals living in the same house
• Take joint decision about the consumption of goods and services.
• Provide services in terms of factor inputs to the firms
• Get paid for these services by firms which households spend on
consumption.
• Money flows from firms to households as factor payments and from
households to firms as expenditure on goods and services.
• It is a circular flow of money or income
Circular Flow of Income
(Two Sector Economy)
(Wages, Rent, Interest and Profits)
Factor Payments
(Y)
Factor Inputs
Financial
Households Savings Firms
Market Investment
(S) (I)
Goods and
Services (O)
Consumption
expenditure
(C)
Savings
(S) Financial Market Firms
Households Investment
(I)
Exports Goods
Exports
Consumption
Expenditure
Nominal GDP
Real GDP =
GDP deflator
•GDP deflator is the ratio of nominal GDP in a year to real GDP of that year
•GDP deflator measures the change in prices between the base year and
the current year.
Per Capital Income and
Personal Income
• Per capita income is the average income of the people of a
country in a particular year.
National Income
Per Capita Income =
Total Population